Sharing the risks

FOR private investors, pooled investment funds can offer the best route into the stock market. But with more than 2,000 to choose from - ranging from global funds to single industry funds such as technology - where should you go? Continuing our series on building your own investment portfolio, We look at how to divide up your savings across the world.

STAYING close to home is usually the number one choice for an investor who is new to shares, because this is the least risky option. Everyone is working in the same currency and it's easier to get information about the firms whose shares you own.

Higher-risk areas are America or Europe, because an investment could suffer if the value of the dollar or the euro dropped. But these currencies and financial systems are generally stable and wellregulated, protection that is by no means guaranteed in the very high-risk emerging markets, such as the Far East.

The size of a company can present a risk. Although any company can go under, large firms are considered less risky than small ones because they are established and less likely to go bust. Small firms, however, have the potential to grow more rapidly.

Because no one can predict which areas will do well and which won't, the best way to invest is to have a slice of every pie, but to restrict the size of the slices depending on each pie's risk profile.

Imagine investing in the shares of small firms in the Far East - a very risky pie. The shares could boom - when you wish all your money was there - or bomb, when you'd rue the day you ever invested.

The risk can be controlled by limiting your investment in the area, in this instance to probably less than 2% of your total savings. In this way you get some (but not all) of the good times if they happen, but any damage to your overall savings from bad times is contained in a small area.

British shares and quality bonds (in essence these are interest-paying IOUs issued by companies and governments) are more reliable pies, so you could happily have big slices of these, along with investments located in America and Europe.

It is helpful to examine the breakdown of the world stock market when you are trying to portion out your own savings. British investors might focus on domestic shares, but logically they should have a significant holding in America because it represents almost 60% of the total of all the world's shares.

Europe by comparison is much smaller at 20%, and Britain is only 10%. Japan has 7% and the rest is in the emerging markets.

British investors generally have too much in the UK and Europe after years of saving into taxfree Peps, which restricted most investment to this region.

But an ideal mix might be 15% to 25% in bonds and 75% to 85% in shares. The shares portion could be 50% in bonds, 30% in the US, 10% in Europe, 5% in Japan and 5% in the Far East. After saving up a fund of emergency cash - experts recommend three months' salary at least - investors could start their portfolio by picking a core UK shares or bonds fund first. They can bolt on smaller pieces of riskier investment as their savings increase.

Alternatively, a global fund will divvy up your money between countries, a process called 'asset allocation'. You could get a separate bond fund to complete the portfolio.

Tim Cockerill at IFA Chartwell suggests HSBC UK Growth & Income and the global fund Foreign & Colonial. This latter is an investment trust - different from a unit trust and generally cheaper, but it works in a similar way.

• Laboratory technician Emily Ayres, 24, switched her regular savings plan from the Fidelity American fund to the Fidelity MoneyBuilder Global fund after the World Trade Centre tragedy last September.

Emily says: 'I got a bit scared when the share prices fell after September 11, so I decided to put new savings into Moneybuilder.' The fund invests internationally, so it is more diversified than the American fund and a less risky home for Emily's £130 monthly savings.

It has turned £1,000 into £1,372 over the past three years, figures from analysts Lipper show. Emily, from Barnstaple in Devon, is also putting £100 a month into the internet eSaver account with Abbey National.